Revaluing all properties in England for council tax would probably mean higher bills for four million homes, a report into council funding says.

But author Sir Michael Lyons said 3.6 million homes would also have paid less if the government had not put its council tax overhaul on hold.

His interim report does not give final recommendations but suggests adding more property bands to the system.

The inquiry will also explore possibly charging for "non-core" services.

Postponing revaluation means those people continue to pay more than they should if up to date house prices were used to determine their council tax

Sir Michael Lyons

The report stated that while four million homes would have moved into a higher council tax band and would therefore be paying higher bills, some 3.6 million would have dropped down one band or more and would have paid less. This would be the scenario if the existing eight-band system was used, it adds.

Sir Michael had originally suggested the government only postpone its revaluation - due to take place in 2007 - for 12 months.

But Local Government Minister David Miliband then announced an indefinite postponement, saying it would not start before the end of the current parliament.

"Whilst I understand this decision, I believe that revaluation will be necessary if council tax is to remain credible as a property-based tax in the long term," Sir Michael comments in his report.

"Postponing revaluation means those people continue to pay more than they should if up to date house prices were used to determine their council tax," he added.

He said the debate focused more on those who would have paid more, instead of those who could have benefited and failed to take in the "fairness" of the situation.

In his report Sir Michael bemoans the complex system of council funding.

The biggest concern we all have is that No 10 or 11 turn round once Lyon's report is finished, flinch at what they see, and then put it under the carpet like so many other reports

Dennis Reed, chief executive LGIU

He says while council tax is the most visible tax, the public is often confused about what services it actually funds.

In his report he said a "disciplined discussion of potential reforms" was needed as part of a more effective approach to managing pressure of local government finance.

Sir Michael said his inquiry was looking at ways of reducing the number of people who would pay more council tax if all homes were revalued, such as increasing the number of property bands and introducing new ones for areas such as London.

One scenario outlined would mean 6.5m households paying less, with 4.6m paying more after revaluation.

Sir Michael said charging for individual council services was "controversial" with "a number of potential advantages and risks", but he said he would explore the issue further for his final report.

Speaking earlier on BBC Radio 4's Today programme he said: "There is no suggestion of core primary services being charged for."

Dennis Reed, chief executive of the Local Government Information Unit - the independent research and information organisation supported by councils and the local government trade unions - said there was "a lot to welcome" about the report.

But he added: "The biggest concern we all have is that No 10 or 11 turn round once Lyon's report is finished, flinch at what they see, and then put it under the carpet like so many other reports."

Council tax replaced the controversial poll tax in 1993 and is paid by domestic property owners.

Rocketing house prices

Household bills in England depend on which of the eight bands from A to H they fall into - which were determined by the Inland Revenue Valuation Office in 1991.

Those in the top band pay three times as much council tax as those in the bottom.

But house price have rocketed since 1991 and the revaluation is concerned with updating those 14-year-old house values.

Councils get 25% of their money from council tax and the rest from central government grants.

That means that when councils need to raise funds locally it produces disproportionately high increases in council tax.

Critics say it is unfair, particularly for pensioners and others on fixed incomes.